Is the ‘Perfect Place’ to Invest as Multiples, Headwinds Decline
The autism therapy industry segment may see a bounceback in dealmaking in the not-so-distant future.
After reaching a fever pitch in 2019, the number of deals has trended downward, with 2022 seeing several high-profile stumbles of major platform companies, inflation, rising interest rates and workforce challenges.
However, several industry insiders attending the Autism Investor Summit tell Behavioral Health Business that these challenges have lessened to the point that dealmaking in the space could soon pick up again.
All the while, the factors that made autism therapy a desirable investment target remain. Many see it as one of the most attractive places in health care to make investments.
“You’re going to have down years in every industry,” Chris Tillotson, CEO of Prospera Healthcare, told Behavioral Health Business. “But I would say from a financial standpoint, this is a perfect place to be.”
Prospera Healthcare is an applied behavioral analysis (ABA) provider based in Dallas. It was founded in 2021.
Tillotson, who spent more than 20 years in home health, likened the development of the autism therapy space to that in the home health and hospice space earlier in his career. That included a spike in interest from investors, high valuations, adjustments to payment models and rounds of highs and lows along the way with expectations for continued growth.
It’s unclear when dealmaking will accelerate. But recent data gives an optimistic indication for the future.
Proprietary deal data tracked by The Braff Group found nine tuck-in deals closed in the first quarter of the year. Dexter Braff, president of the M&A advisory firm, said in a presentation that he was “surprised” by that number but that it remains to be seen if the first quarter was the start “of a trend or if it is an anomaly.”
“I was very encouraged to see the nine transactions … [If] that holds up, then the market is more solid than some of the bad things that have happened would suggest,” Braff said.
The Braff Group tracked 46 deals in 2019. In 2014, that number was 11 and last year, it was 40.
What hasn’t changed
Investors and providers alike still see autism therapy as a prime place to invest. However, investment in the space has gotten more realistic.
Mike Moran, co-founder and executive advisor of Calabasas, California-based M&A Healthcare Advisors, sees the downtick in deal volume as a normalization in the space. He also notes that deal volumes remain high compared to historic levels leading into 2019 and 2021, a historic dealmaking year for all of behavioral health.
“Autism services is still one of the most coveted segments that we reside in, in terms of banking and being an intermediary for those folks and a variety of segments,” Moran said. “If you have the right asset, autism services is essentially where you want to be that still remains most attractive in terms of the buyer — financial or strategic.”
The underlying demand for autism services is as high as ever, with providers frequently reporting much more demand than they can serve. That demand is likely to continue as stigma mitigation and detection of autism improve.
Autism diagnoses have increased in the U.S. A monitoring program operated by the Centers for Disease Control and Prevention raised its estimate of the rate of autism in youth to 1 in 36, up from 1 in 44, earlier in April 2023.
“From an investment perspective, all the fundamentals of what you’re looking for are very strong,” John Arnold, a transaction attorney and partner at Holland & Knight, told BHB.
Holland & Knight is a large Miami-based multispeciality law firm.
Arnold pointed to reimbursement trends, market fragmentation and growing demand as core to the investment opportunity. He also said workforce issues are lessening in the behavioral health space and that much of the COVID pandemic’s fallout has come under control.
Many of the truisms of investing in health care also apply to the behavioral health space.
“I think that a lot of the world understands now that healthcare is very recession-proof — whatever happens in the economy, we still always need these services,” Rachel Boynton, managing director and partner at the M&A consulting firm Vertess told BHB. “And there’s huge growth in the ABA space.”
What has changed
Increasing savvy on the part of investors coupled with recent industry struggles have pushed down the range for deal multiples in the autism therapy space.
Between 2020 and 2023, the typical multiple ranges for an autism therapy business was five times to 10 times earnings, down from 5.75 times earnings to 14 times earnings from the middle of 2016 to the middle of 2019.
“The valuation ranges at the top end of the marketplace are still very much higher than what we would expect in any other market segment,” Braff said. “Right now, the top end of the Medicare-certified home health market — which is a huge market that’s been consolidating for many, many, many years — is 8x.
“To get above that is really hard.”
Still, multiple compression may attract dealmaking because companies are more affordable.
Braff expects more opportunistic acquisitions, meaning “being able to buy stuff on the cheap as a buyer.”
Labor markets have cooled somewhat in recent weeks. This provides some relief from the top pressure for autism therapy providers — labor costs. On top of stagnant reimbursement rates, wage inflation drove many frontline clinicians out of autism therapy altogether and into less emotionally intensive work.
“I do think there is a degree of optimism, and that’s supported by several things,” Ben Matz, managing director at the investment bank B. Riley Securities, told BHB. “Candidly, labor markets are cooling. There is the idea that reimbursement models will have to catch up.”
Matz said now may be an ideal time for reimbursement innovation and the advancement of value-based care. He also pointed to the increased use of technology to make the autism therapy space much more efficient.
When will autism therapy deals bounce back?
Matz estimated that dealmaking will pick up in the second half of 2023, noting the increase in quarterly dealmaking in the first quarter.
Arnold also expects deal activity to start picking back up in the next two to three quarters, adding that it’s not clear if that will be platforms “recapitalizing and trading or a return of M&A activity where platforms pursue growth through acquisitions.”
Rob Marsh, CEO of 360 Behavioral Health, sees a longer-term rationalization in the market before deal activity picks up.
“I think we are going to see this for the next 12 months or so where there’s just not going to be a whole lot of resources going onto ABA,” Marsh said. “Coming in 2024, I think you’ll see a lot more capital coming towards the M&A side.
Chatsworth, California-based 360 Behavioral Health provides autism therapy and support services and operates 17 locations in California.
“There’s lots of fragmentation still in the market; there are way more little mom-and-pop shops that are wanting to sites that are looking for larger organizations to pick them up.”